Intel (INTC) Q3 2024 Earnings Call Transcript

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Intel (NASDAQ: INTC)
Q3 2024 Earnings Call
Oct 31, 2024, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Thank you for standing by, and welcome to Intel Corporation's third quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator instructions] As a reminder, today's program is being recorded.

And now, I'd like to introduce your host for today's program, Mr. John Pitzer, corporate vice president, investor relations. Please go ahead, sir.

John Pitzer -- Corporate Vice President, Investor Relations

Thank you, Jonathan. By now, you should have received a copy of the Q3 earnings release and earnings presentation, both of which are available on our Investor Relations website, intc.com. For those joining us online today, the earnings presentation is also available in our webcast window. I am joined today by our CEO, Pat Gelsinger; and our CFO, David Zinsner.

In a moment, we will hear brief comments from both followed by a Q&A session. Before we begin, please note that today's discussion does contain forward-looking statements based on the environment as we currently see it and, as such, are subject to various risks and uncertainties. It also contains reference to non-GAAP and segment financial measures that we believe provide useful information to our investors. Our earnings release, most recent annual report on Form 10-K and other filings with the SEC provide more information on specific risk factors that could cause actual results to differ materially from our expectations.

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They also provide additional information on our non-GAAP and segment financial measures, including reconciliations, where appropriate, to our corresponding GAAP financial measures. With that, let me turn things over to Pat.

Patrick P. Gelsinger -- Chief Executive Officer

Thank you, John, and good afternoon, everyone. I appreciate you joining us today. We delivered Q3 revenue above the midpoint of our guidance, and we made significant progress on our cost reduction plan. That said, Q3 profitability was negatively impacted by the charges we referenced on our Q2 call.

This reflects the aggressive actions we are taking to lower our cost, improve our efficiency, and enhance our market competitiveness. Dave will go into these charges in detail shortly. Operationally, Q3 results exceeded our expectations as we achieved key milestones across Intel Foundry and Intel Products. Underlying trends in the business are improving at a measured pace, and our outlook for Q4 is modestly above current consensus.

Overall, our stepped-up focus on efficiency and execution across the business is having a positive impact. We have a lot more ahead and we are acting with urgency to deliver on our priorities. We need to fight for every inch and execute better than ever before, and our teams are embracing this mindset as we build a leaner, more profitable Intel. Now, let me provide more detail starting with an update on our cost reduction plan that we announced three months ago.

First, we completed the vast majority of our head count actions during Q3 and we are on track to our greater than 15% workforce reduction before the end of the year. These were hard but necessary changes that are reducing complexity and making us a leaner, faster and more agile company. Second, we have reduced our capital expenditures by over 20% relative to the plan we had entering the year. We are now well positioned with our shell ahead strategy to react quickly to market demand.

With our transition to EUV now complete and the launch of Intel 18A on the horizon, we have a more normal cadence of no development at Intel 14A and beyond. In addition, our teams are maniacally focused on improving fab productivity, allowing us to produce more with less over time. Third, we have begun to simplify and streamline parts of our portfolio to unlock efficiencies and create value. We are reestablishing product portfolio leadership by narrowing our focus on fewer projects with the top priority being to maximize the value of our x86 franchise across the client, edge and data center markets.

As part of our portfolio simplification, we will move our edge business into CCG and refocus our NEX portfolio on networking and telco. We will also integrate our software business into our core business units to foster more integrated solutions that address our customers' most difficult challenges. We are evaluating other portfolio actions, which we will communicate when appropriate, and we plan to provide new segment reporting that reflects these portfolio shifts in Q1 of 2025. Related to our cost and efficiency actions, the restructuring charges we took in Q3 were significant and necessary to rightsize the company as we reduced spending by over $10 billion in 2025.

There was also a sizable impairment mostly related to Intel 7 equipment and space, reflecting excess COVID-era spending that we have concluded cannot migrate to more advanced nodes now that we have fully transitioned to EUV processing. From a broader financial perspective, the actions we took in Q3 go a long way toward delivering the 2025 financial commitments we outlined last quarter. Specifically, we plan to reduce nonproduct cost of sales by $1 billion, lower opex to $17.5 billion and drive gross and net capex to between $20 billion to $23 billion and $12 billion to $14 billion, respectively. We expect adjusted free cash flow to be positive next year, and we will focus on decreasing leverage and improving liquidity.

Let me go into greater detail on the business, starting with Intel products. We continue to focus on our core x86 franchise and the ecosystems we have developed over 40-plus years of investing. They are a tangible source of value and differentiation for Intel, our partners and our collective customers and help to cement the x86 architecture as uniquely positioned to meet customer demands going forward. We are taking steps to supercharge and further unlock the value of our x86 franchise.

We intend to drive new levels of customization, compatibility, and scalability needed to meet current and future demands of next-generation computing. And we see this unlocking a range of meaningful opportunities across all our businesses. I am particularly excited about our recent announcement with AMD to create the x86 ecosystem advisory group. We are bringing together leaders from across the ecosystem to help shape the future of x86 with a focus on simplifying software development, ensuring interoperability and interface consistency across vendors and equipping developers with standardized architectural tools and guidelines.

Broadcom, Dell, Google, HPE, HP Inc., Lenovo, Meta, Microsoft, Oracle, Red Hat have signed on as founding members, as have industry luminaries Linus Torvalds and Tim Sweeney. Turning to our product segments. In CCG, we continue to lead the AIPC category. In September at IFA, we launched our Intel Core Ultra 200V Series processors formerly named Lunar Lake.

This is the most efficient family of x86 processors ever created, setting a new standard for mobile AI performance and significantly outperforming competitor platforms. Lunar Lake's combination of superior performance at comparable and competitive battery life positions us well to continue to define and lead the AIPC category. We also continue to nurture the most robust AIPC ecosystem in the industry with more than 100 ISVs, 300 applications and 500 AI models powered by Core Ultra, and we remain on track to ship more than 100 million AIPCs accumulated by the end of 2025. Next up is Arrow Lake, which launched earlier this month and brings the power of the AIPC to the desktop, delivering a huge leap in performance per watt and bringing the NPU to enthusiast desktop and entry workstation platforms for the first time.

All of this is paving the way toward the launch of Panther Lake in the second half of 2025. Panther Lake will be our first client CPU on Intel 18A, a more performant and cost competitive process that will allow us to bring more wafers home and improve overall profitability. Overall, we are making good progress in CCG. Our share position is strong with a product road map and ecosystem that is increasingly setting us apart from our competition, especially in the enterprise market as customers continue to see increasing value from our vPro solutions.

Turning to DCAI. Our focus is squarely on delivering powerful AI systems that provide enterprise customers with greater choice and flexibility, optimal performance per watt and lower total cost of ownership. And this quarter's launches significantly enhance our market competitiveness even as we recognize we have more work to do. We launched our latest Xeon 6 product, codenamed Granite Rapids, which doubles the performance of the prior gen with increased core counts, memory bandwidth and embedded AI acceleration.

The new Xeon 6 is tailor-made to handle compute-intensive workloads with exceptional efficiency from edge to data center and cloud environments. This solidifies our position as the head node of choice in AI servers. Greater than 70% of [Inaudible] servers are already using Intel Xeon as the host CPU. And we have a significant opportunity to build on this as we continue reestablishing Xeon's competitive strength and market leadership.

This quarter, we also launched our Gaudi 3 AI accelerator, which delivers twice the networking bandwidth and 1.5x the memory bandwidth of its predecessor for large language model efficiency. While the Gaudi 3 benchmarks have been impressive, and we are pleased by our recent collaboration with IBM to deploy Gaudi 3 as a service on IBM Cloud, the overall uptake of Gaudi has been slower than we anticipated as adoption rates were impacted by the product transition from Gaudi 2 to Gaudi 3 and software ease of use. As a result, we will not achieve our target of $500 million in revenue for Gaudi in 2024. That said, taking a longer-term view, we remain encouraged by the market available to us.

There is clear need for solutions with superior TCO based on open standards, and we are continuing to enhance the Gaudi value proposition. In NEX, we announced last month that we will be focusing the business on networking and telco as part of our efforts to simplify our portfolio, drive productivity and enhance our market position. We will move our edge business into CCG, which creates a meaningful opportunity to more efficiently leverage our core client business and extend our leadership to a wide range of vertical edge solutions, especially as AI on the edge accelerates. As a simpler, more focused NEX, we are better positioned to gain profitable share in the most attractive markets.

In networking, we continue to further open-source Ethernet solutions for connectivity through our Ultra Accelerator Link and Ultra Ethernet Consortium. Let me now turn to Intel Foundry. A key part of our strategy is returning to process leadership through disciplined execution of our road map. Intel 18A, our fifth node in four years, is healthy and continues to progress well at this stage in the development process.

Our lead vehicles for Intel 18A, Panther Lake, and Clearwater Forest, have met early 18A milestones ahead of next year's launches. In addition, we have seen good traction with the release of our 1.0 PDK last quarter and the material increase in the engagements and the number of RFQs we are actively quoting. While we will not win them all, we are confident in our head-to-head position based on feedback from potential customers. Most recently, as announced, we are finalizing a multiyear, multibillion dollar commitment by AWS to expand our existing partnership to include a new custom Xeon 6 chip on Intel 3 and a new AI fabric chip on Intel 18A.

Beyond AWS, we added two additional 18A wafer design wins this quarter from compute-centric companies, and our pipeline of potential wafer designs has grown nicely over the quarter. Given our leadership in advanced packaging capabilities, we also added multiple back-end design wins this quarter. We were also awarded an additional $3 billion in direct funding under the Secure Enclave program to produce leading edge semiconductors for the U.S. government.

We are proud to be the U.S. government's partner of choice to fortify the domestic semiconductor supply chain and ensure the U.S. maintains its leadership in advanced manufacturing, microelectronic systems and process technology. Moving forward, as we shared last month, we are creating clear separation for Intel Foundry by establishing the business as an independent subsidiary.

This is important to our external foundry customers and will give us future flexibility to evaluate independent sources of funding and optimize the capital structure of Intel Foundry and Intel Products. We are in the process of forming a fiduciary board for the new foundry subsidiary, which will include independent directors with deep semiconductor experience. In our All Other category, our No. 1 priority is to unlock shareholder value.

For Altera, revenue increased 14% sequentially and operating profit turned positive in Q3. We also announced the introduction of our new midrange and small form factor products, Agilex 5 and Agilex 3, to serve broad market customers and segments. With an increasingly competitive road map, the business is well positioned to show continued top and bottom-line improvements. Consistent with what we have said previously, we remain focused on selling a stake in Altera on a path to its IPO in the coming years.

To that end, we have begun discussions with potential investors and expect to conclude in early 2025. For Mobileye, the company continues to be a leader in the development and deployment of advanced driver assistance systems. And by providing Mobileye with separation and autonomy, we have enhanced its ability to capitalize on growth opportunities and accelerate its path to creating even greater value. The company recently hosted an AI event laying out a comprehensive strategy for camera-centric compound AI systems providing a full range of autonomous driving solutions.

Wrapping up, our Q3 results reflect heightened focus, discipline and execution you can expect moving forward. We are rigorously managing our costs and improving our profitability to create long-term shareholder value. We are carefully managing our cash to strengthen our balance sheet and improve our liquidity. And we are staying closely connected with customers and partners as we innovate to meet their most challenging needs.

Q3 also reflected some very difficult decisions we made to rightsize the business, and I want to recognize the hard work of our employees. We put some points on the board over the past few months, but we are far from satisfied. We view every quarter as a new opportunity to up our game and continue to execute well, and that is our mindset entering Q4. With that, I will now turn it over to Dave.

David A. Zinsner -- Executive Vice President, Chief Financial Officer

Thank you, Pat, and good afternoon, everyone. Third quarter revenue was $13.3 billion, up 4% sequentially and in the upper half of the range we provided in August. Intel Products and Intel Foundry both delivered sequential revenue growth even as we navigated an inventory drawdown in clients. Turning to non-GAAP gross margins.

As you know, last quarter, we guided gross margins of 38% but indicated that we expected incremental costs associated with our spending reduction plan and some of those costs would likely impact non-GAAP gross margin. We recognized approximately $3 billion of noncash impairment and accelerated depreciation charges, primarily for Intel 7, which are above and beyond our quarter-to-quarter asset adjustments, driving our non-GAAP gross margin down to 18% and EPS to a loss of $0.46. This $3 billion charge reduced non-GAAP gross margin by approximately 2,300 basis points and EPS by approximately $0.61 per share. Beyond those impairment charges, we also were impacted by $15.6 billion of charges that are excluded from our non-GAAP results.

These charges have three main components: first, we impaired our deferred tax asset balance by nearly $10 billion, which was triggered by cumulative GAAP-based losses over the last three years; second, a $2.6 billion goodwill impairment related to Mobileye, which shows up in our consolidated earnings; and lastly is $2.2 billion associated with the severance of approximately 15% of our employees, aligned with our plan to reduce operating expenses to $17.5 billion and take out $1 billion of other cost of sales next year. This last charge is the only charge with a cash impact. The tax asset impairment charge will not affect cash taxes going forward, and full details are in the 10-Q, which will be available tomorrow. Q3 operating cash flow was $4.1 billion, up approximately $1.8 billion sequentially on better working capital.

We had growth capex of $6.5 billion in the quarter, resulting in adjusted free cash flow of negative $2.7 billion. We expect the principal cash cost associated with the restructuring charges to land in Q4 '24. We have $24.1 billion of cash and short-term investments, paid down $2.8 billion of debt in the quarter and remain focused on delevering next year as cash from operations continues to improve. Moving to segment results.

Intel Products revenue was $12.2 billion, up 3% sequentially. CCG revenue was down 1% quarter over quarter as customers work down their inventory as expected. DCAI revenue was up 10% sequentially as demand for traditional servers improved. Revenue per NEX was up double digits sequentially as elements of this business start to recover off a cyclical bottom.

Q3 operating profit for Intel Products was $3.3 billion, 27% of revenue and up $400 million quarter over quarter on higher revenue and reduced operating expenses. Operating income was negatively impacted by a $300 million write-down of accelerator inventory due to reduced revenue expectations. Intel Foundry delivered revenue of $4.4 billion, up slightly sequentially, driven by increased wafer mix of Intel 4 and 3. Foundry operating loss of $5.8 billion was down sequentially, materially driven by the $3 billion impairment charges I discussed earlier.

We expect losses to continue at approximately the same rate in Q4, minus this impairment charge. Next year, as we move to nodes with a better cost structure and realize the savings associated with the restructuring actions, we expect operating losses to improve significantly. Additionally, we're intensely focused on driving improved returns on our roughly $80 billion of tangible book value, most of which is associated with Intel Foundry. Mobileye reported revenue of $485 million and maintained full year guidance for revenue and adjusted operating income.

Q3 revenue was down 8% year over year, primarily driven by a more than 50% reduction in shipments to China where comparisons will become easier as the exposure is now significantly smaller. Cash generation was quite strong as operating cash flow was well above operating income. Altera delivered revenue of $412 million, up 14% sequentially, consistent with guidance to support improved lead times by our distribution partners. Operating margins increased sequentially by 900 basis points on better gross margins and spending discipline.

For Q4, we expect high single-digit sequential revenue growth as we work with our distribution partners to prepare for the cutover to Altera independent warehouse operations. Overall, billings remain below consumption as end customers continue to work down inventory tied to previous supply constraints. We anticipate inventory normalization will continue through the first half of next year. Now, turning to our Q4 guidance.

We successfully worked down client customer inventory levels in Q3, in line with our expectations. And despite continued client customer inventory reductions in Q4, CCG should grow toward the higher end of seasonal off an abnormal Q3. Revenue is expected to be flat sequentially across DCAI and NEX businesses in aggregate. Based on these factors, we expect revenue of $13.3 million to $14.3 billion in the fourth quarter.

At the midpoint of $13.8 billion, we expect gross margin of approximately 39.5%, with a tax rate of 13% and EPS of $0.12, all on a non-GAAP basis. On a GAAP basis, as we continue to execute on our cost actions and portfolio decisions, we expect additional restructuring charges in Q4. We continue to size the business to support trend line revenue growth of 3% to 5% annually, with the ability to scale up to 7% to 9% as demand dictates. We anticipate that our 2024 gross and net capital investments will be approximately $25 billion and $11 billion, respectively.

Our expectation is for adjusted free cash flow to be negative in 2024 due to the restructuring charges disclosed today and the uncertainty around the timing of capital offsets as we approach year-end. In 2025, with opex of approximately $17.5 billion and gross and net capex of $20 billion to $23 billion and $12 billion to $14 billion, respectively, we expect to achieve positive adjusted free cash flow. Before I close, let me take a moment to remind you of a couple of items as you model 2025 and that today's restructuring and impairment charges are in service to achieve this financial model. First, we are positive on the growing market adoption of the AIPC and our strong product positioning.

As our mix of outsourced products and CCG grows in calendar year 2025, and we ramp Intel 18A to support Panther Lake, gross margin expansion could be muted, particularly in the second half. We expect gross margin fall-through to significantly improve in 2026, driven by the vastly improved cost structure of Intel 18A, the return of tiles to a meaningfully underutilized Intel Foundry and operational efficiencies. Second, the estimated $700 million on a GAAP basis of noncontrolled income from Mobileye, Altera, IMS and the portion of the SCIPs earned by our partners is expected to be heavily weighted to the second half of 2025 and will continue to grow in future years with the ramping of wafer outs at our SCIP fabs in Arizona and Ireland. In closing, our profitability remains well below the standards we've set and recognize there's much more work to be done to improve the efficiency of the business.

We're encouraged by the progress we made this quarter to rightsize the spending. And our process and product execution, combined with a strong external customer traction in the quarter, give us confidence our strategy will deliver compelling shareholder returns. I'll now turn it back over to John to start the Q&A.

John Pitzer -- Corporate Vice President, Investor Relations

Thank you, Dave. We will now transition to the Q&A portion of our call. As a reminder, we would ask each of you to ask one question and a brief follow-up question where applicable with that. With that, Jonathan, can we take the first question, please?

Questions & Answers:

Operator

Certainly. And our first question for today comes from the line of Ross Seymore from Deutsche Bank. Your question, please.

Ross Seymore -- Analyst

Hi, guys, thanks for letting me ask a question, and congrats on solid results. Pat, I want to talk about the 18A transition. Can you just talk about what are the metrics we're going to be able to see externally on this to give people confidence in the ability to ramp it? You've said it's healthy. You've talked about new design wins.

But when are some of the true metrics going to come, either internally, or perhaps, even more importantly, externally, as your Intel Foundry revenue from an external customer base grows?

Patrick P. Gelsinger -- Chief Executive Officer

Yeah. Thanks, Ross. And obviously, this was a good quarter on the progress that we had, three new customers, Amazon, which we were public on a few weeks ago, Panther Lake and Clearwater Forest, internally. Two new external customers added to that.

So, solid progress on it. Clearly, next year, there's not a lot of financial benefit from it because we're only ramping late in the year. Thus, we'll be giving more qualitative metrics on progress as we go through the year, Ross. We'll continue to update, give LDV updates, lifetime deal value for foundry updates as we go through the year.

Clearly, as we get more customers, we'll be updating on that progress. It has much larger impacts on '26 financials as we ramp and bring wafers home as well as move into the better margin structure that we'll have on Panther Lake with 18A and across the product line. So, we'll be giving clarity in that way, but it will be hard to tie it to specific financials next year, but this is super important for us, for our foundry business, for the industry, so we'll be giving plenty of color as we proceed.

John Pitzer -- Corporate Vice President, Investor Relations

Ross, do you have a follow-up question, please?

Ross Seymore -- Analyst

Yes, I do. One for Dave on the gross margin side of things. Just somewhat chronologically, ex the charges, it looks like you're about a 41% gross margin in the second -- or excuse me, the third quarter. I know that's not where you want to be overall, but that's much better than you guided.

So, what was the cause of the upside there? Why is it going down in the fourth quarter? And what are the big picture puts and takes that you're alluding to about the gross margin leverage or lack thereof, especially as we get into the second half of next year?

David A. Zinsner -- Executive Vice President, Chief Financial Officer

Yeah. Good question. OK. So, I would say the third quarter surprise was really associated with better sell-through of previously reserved inventory.

I think that was the thing that excited us the most in the third quarter. As we look into the fourth quarter, we'll have that better sell-through won't repeat itself. So, that will be a fundamental driver of why the gross margins kind of slipped down absent the impairment charge. And additionally, we're going to have more start-up costs in the fourth quarter associated with 18A than we did in the third quarter.

So, that's going to put a little pressure on the gross margins. But I do think the 39.5% guide at the midpoint for the fourth quarter is a pretty clean guide. It has less kind of noise around it than some of the previous quarters. So, I think it's a good kind of metric to kind of start to inform how '25 will look in terms of gross margins.

We're not going to provide guidance yet on '25. It's still early. I would say the puts and takes of it are, for sure, as Pat indicated, we're all in on AIPC and in particular, we're all in on Lunar Lake, which is our next-generation product. As you know, Lunar Lake has the memory in the package.

That affects the gross margins, and I think it's going to weigh down the gross margins on the product side of the business for us in '25. Now, as you know, Panther Lake's the next one. The margins get better just at the product level, but also include more mix of wafers internally, which also helps the foundry business. So, as we get more volume ramping in '26, and Panther Lake, that's going to be helpful for gross margins.

On the foundry side, we will see improvement next year. You won't see it because we don't report it at that level, but we will see gross margin improvement on the foundry side as we step into '25, partly because of the reductions we talked about. As we talked about, we're going to reduce our spending by more than $10 billion, $1 billion of it is directly in cost of sales associated with the Intel Foundry business getting more efficient in terms of their spend. Additionally, we're just going to be mixing more to EUV wafers.

EUV wafers have a better pricing dynamic. They have a better cost structure on a relative basis. So, we see improvement there. And I've been pleased with just the new model of managing the foundry business with a P&L.

I've seen all kinds of better decision-making going on, both at Foundry and at the Products side, just to optimize their cost structure in a better way. And that should help as well. Longer term, I just think as we continually improve our product portfolio, both in Foundry and Products, that usually commands a better margin profile and also longer term be a tailwind. But not yet, I think, something that shows up meaningfully in '25.

Patrick P. Gelsinger -- Chief Executive Officer

And I would just add that as we indicated on our last quarter's earnings call, as we go through this restructuring phase, we're in the next phase of our transformation. With that, we're much more focused on the sustainable business model results, shareholder return, financial disciplines. The first phase is very much about getting back in the game, getting process in place, getting shell ahead in place, getting our products competitive. So, I think overall, Ross, we're going to be much more focused on it.

Those are the tough actions we've taken this quarter on getting our cost base where we need to be. And overall, the operating margin, the gross margins of the company, overall cost base, capex investment, they're just getting a lot more attention from us as we go forward.

John Pitzer -- Corporate Vice President, Investor Relations

Thank you, Ross. Jonathan, can we have the next question, please?

Operator

Certainly. And our next question comes from the line of Timothy Arcuri from UBS. Your question, please.

Timothy Arcuri -- Analyst

So, Pat, I think you mentioned at a conference maybe in September that defect density on 18A is you said sub-0.4, I think. Can you just talk about how that translates to yields? Is that sort of an enough number to translate into high volume? And what sort of number for, say, defect density does a customer want to see when they're looking at your foundry?

Patrick P. Gelsinger -- Chief Executive Officer

Yeah. And defect density, it's a complex conversation, Tim, because that big die sizes have lower percent yields, right, even at the same defect density. So, it's very variable depending on the particular die size of the product. So, when we said the D0 of less than 0.4, that was a healthy yield number at this phase of the process development.

That's not yet a high-volume production yield level, but we're not at that phase of the process development yet for 18A. So, it's a number that says we are at where we'd want to be at this point in the process development life cycle. Clearly, as you bring it to high-volume production, which we'll be doing in the second half of next year, we have to be markedly lower than that in terms of defect density. But we believe that we see all the signs, the signals, and we're managing this very carefully to accomplish that as we get to next year.

Similarly, as we look at today's Intel 3, we're accomplishing the defect densities with the maturity levels that we'd expect on that. But again, yield in the process technology is something you're never done with, right? You hit key milestones on quality, yield, and then you go into high-volume production, and you continue to work on that going forward. I'd also emphasize that the Arizona ramp is important for us as we move to 18A. That comes online in volume in the second half of next year.

And that's all on track as well as we have tool move-ins, EUV tools, and qualification now, first wafers coming out of the volume fab in Arizona in Q1 of next year. So, overall, we're progressing well, and we'll be giving you updates as we proceed.

John Pitzer -- Corporate Vice President, Investor Relations

Tim, do you have a follow-up question?

Timothy Arcuri -- Analyst

I do. Yeah. I have a question on Panther Lake, Pat. So, I know that it's coming back in-house, but we do still hear that most tiles are still being outsourced.

Can you speak to that? Is that a change? Or was that always the plan? And I guess when you look at Nova Lake on the desktop side, is it still being dual tracked, meaning that there is still an option that it could be outsourced? Or is it guaranteed to be brought back in-house? Thanks.

Patrick P. Gelsinger -- Chief Executive Officer

Yeah. Thank you. Panther Lake, some tiles would be external, but the majority of the millimeter square in the package are back internal. It's more 70-plus percent of the silicon area is back in-house.

So, the majority of Panther Lake wafer capacity by a good margin is coming back inside for Intel. Nova Lake, we definitely have some SKUs that we're looking at continuing to leverage externally, but the large majority of Nova Lake and more of the additional tiles have come back in-house as well. So, we still have some flexibility in the Nova Lake product, but the large majority of that is committed to the Intel Products -- or Intel Foundry. So, overall, we are absolutely executing on the bringing wafers home strategy that we've laid out.

That said, TSMC has been a great partner. Clearly, Lunar Lake has demonstrated the strength of the partnership and one that we'll use selectively in our product lines for the future. But a large percentage of wafers coming home. That meaningfully fills our factories.

That also meaningfully improves the margin structure of Intel and Intel Products.

John Pitzer -- Corporate Vice President, Investor Relations

Thanks, Tim. Jonathan, can we have the next question, please?

Operator

Certainly. Our next question comes from the line of C.J. Muse from Cantor Fitzgerald. Your question, please.

C.J. Muse -- Analyst

Yeah. Good afternoon. Thanks for taking the question. I wanted to follow up on that last question.

In terms of the optionality in terms of securing leading-edge capacity, obviously, you're all in on 18A. But if that were to get delayed, what do you have in terms of negotiated capabilities in terms of securing capacity in '26, '27? And on the other hand, if 18A proves to be more successful, how are you thinking about time frame being more aggressive in terms of adding capacity in Arizona?

Patrick P. Gelsinger -- Chief Executive Officer

Yeah. Thank you, C.J. I'll say we have optionality in the product portfolio that way. We have more resilience in our supply chain than competition does as a result.

So, we feel quite good about that. We continue to really value the relationship, right, with TSMC. And our product portfolio is set up very nicely with respect to 18A capacity. Given our shell ahead strategy and the investments that we've made over the last several years, we have a lot of flexibility to scale up if market conditions require for our products, but also if market conditions require for our foundry customers as well.

And given the margin stacking nature that we uniquely are able to benefit from, every wafer we bring home adds to the margin structure of Intel in a meaningful way. So, we really are setting ourselves up very nicely for the future. And as we make progress on 18A,18AP, 14A, an aggressive road map, advanced packaging, which is uniquely based on Intel technologies and finding more momentum in our product line, but also in our foundry customers, we really are starting to see the benefits of the long-term strategy that we've put in place with Intel Products, with Intel Foundry.

John Pitzer -- Corporate Vice President, Investor Relations

C.J., do you have a follow-up question?

C.J. Muse -- Analyst

I do. You know, following the better -- the consensus guide for Q4, could you give us an early read on how you're thinking about seasonality into Q1?

David A. Zinsner -- Executive Vice President, Chief Financial Officer

Yeah. So, we're not going to provide, C.J., guidance for Q1. Let's work on Q4, and we can update you in January. But the average seasonality for Q1 is in the 8% to 10% range, and we'll give you more color as we get into next quarter's earnings, whether we are going to be seasonal or see things differently than that.

Patrick P. Gelsinger -- Chief Executive Officer

Yeah. And I'd say, overall, it's hard to say. We have geopolitical factors and other things that the world is looking at, and I don't think we have any wisdom beyond that at this point. We're clearly trying to manage the business to a cost structure that we're very comfortable with.

But as we indicated by the last question, C.J., we have a lot of flexibility to scale up, if necessary, or we have the opportunity to do that as well. And overall, there's quite a bit of uncertainty, I think, in the marketplace. So, our strategy positions us well to deal with those overall uncertainties that we don't control, but we're very committed to control what we can directly do.

John Pitzer -- Corporate Vice President, Investor Relations

Thank you, C.J. Jonathan, can we have the next question, please?

Operator

Certainly. And our next question comes from the line of Vivek Arya from Bank of America. Your question, please.

Vivek Arya -- Analyst

Thanks for taking my question. For the first one, I want to go back to 2025 and how we should kind of conceptually look at it. I think at one point, your trend line of 3% to 5% growth top line, is that how we should think about sales? And then on the gross margin side, Dave, you said that muted expansion. And then if I look at your Q4 of 39.5%, is that sort of what you imply for 2025? And I asked that because I think at some other point, you also mentioned headwinds in the second half of '25.

So, that got me confused as to whether it could dip below these levels. So, just -- I know you're not giving '25 outlook, but you did give a trend line number, and you did kind of give us the 39.5% metric. So, any color would be very useful.

David A. Zinsner -- Executive Vice President, Chief Financial Officer

Yeah. So, on revenue growth, again, we're not going to -- for 2025. I'd say just that we are managing the business in terms of how we're investing in the business to a 3% to 5% growth rate next year, but over time, in our minds. And if things turn out to be better, then that's a good fall-through to us from a profitability perspective.

I wasn't suggesting that you take the 39.5%, you move it every quarter. Clearly, every quarter is going to have some unique aspects to it. Only that 39.5% was a quarter in which it was clean, and it was a good proxy to start the calculation for the full year of '25. You're right, yes, we do see more headwind in the second half versus the first half, given Lunar Lake becoming a more meaningful part of the volume over time for 2025.

Again, that starts to improve in the following year as Panther Lake becomes more and more meaningful part of the volume for the client business in 2026.

John Pitzer -- Corporate Vice President, Investor Relations

Vivek, do you have a follow-up question, please?

Vivek Arya -- Analyst

Yes. Thank you, John. So, maybe one for Pat. Pat, what does the future look like for Intel's data center if there is no competitive AI product? Is just being CPU-centric good enough? At what point does the CPU get commoditized, like custom chips, or replaced with ARM-based products? What is Intel's AI strategy right now?

Patrick P. Gelsinger -- Chief Executive Officer

Yeah. Thank you, Vivek. Maybe three different perspectives, just to highlight. Number one is the CPU plays an increasing role in data center AI compute.

And even in cloud-based environments today, head nodes are an area of strength for Intel's Xeon already, as I reflected in my comments. As you go into enterprise AI, we expect to play a more prominent role. Databases, embeddings, refinement are much more attuned to CPU workloads. And our strategy there is CPU plus accelerator or CPU plus Gaudi.

So, we see the enterprise use cases having a very long life associated with them going forward. Second, as I said, Gaudi 3, good product and seeing good early interest from customers. We mentioned the IBM win, but a good pipeline of activities there. So, Xeon plus accelerator in that regard.

And as we launched this quarter, we also have the x86 ecosystem advisory. We are breathing life into the x86 architecture, and we're seeing extraordinary interest from the industry, from luminaries, and how we build on that momentum. So, we definitely want to be very front footed with x86 for a full range of use cases, but also the AI use cases as well. And the industry's quite interested in joining us participating and expanding the world's greatest architecture of all time, the most industry influence, the broadest number of ISVs and applications, and continuing that momentum forward.

John Pitzer -- Corporate Vice President, Investor Relations

Thank you, Vivek. Jonathan, can we have the next question, please?

Operator

Certainly. Our next question comes from the line of Aaron Rakers from Wells Fargo. Your question, please.

Aaron Rakers -- Analyst

Yes. Thanks for taking the question. I appreciate it. Two questions if I can as well.

So, first on the foundry business. As you guys ramp that, we start to focus on the ramp of 18A looking forward given the pipeline of the design wins that you guys have talked about. I'm curious, how large is your external piece of that, call it, $4.4 billion revenue in this most recent quarter? I think it was about $77 million last quarter. And how do we think about the pace of that kind of inflecting higher as we look out into '25, '26? And I'm just curious how you would define success in that external business.

Patrick P. Gelsinger -- Chief Executive Officer

Yeah. So, overall, the external foundry business will be a modest portion, right, of the foundry business for the next couple of years. The foundry revenues will be dominated by the internal products, as we've been building that portfolio for many years. So, we'll ramp as we go through the rest of the decade.

We said our financial objectives by the end of the decade are $15 billion plus of external foundry revenue. We'll be giving periodic updates on LDV, lifetime deal value, of external foundry customers as we go forward. And indicators like we did this quarter of new design wins, new customers are coming on online. But the reported numbers for Intel Foundry will be substantially dominated by the Intel Products for the next couple of years.

That said, we saw a nice growth, right, quarter on quarter in the external foundry business, and we did break profitable for the advanced packaging portion of that business in Q3. So, we are seeing nice growth characteristics, nice business characteristics, and we'll be giving more updates as we go forward. Dave, anything to add on that?

David A. Zinsner -- Executive Vice President, Chief Financial Officer

No. I mean, other than -- it was up a bit this quarter but still dominated by internal business within the Intel Foundry business.

John Pitzer -- Corporate Vice President, Investor Relations

Aaron, do you have a follow-up question?

Aaron Rakers -- Analyst

Yeah, I do. Thanks. Real quickly, on the server side of the business, kind of off the prior question. I guess there's a continual discussion or debate of like Intel's positioning as far as stabilizing or recapturing share position in x86 service.

I'm curious as we think about Granite Rapids, we think about Clearwater Forest and Diamond Rapids, how do you characterize your ability to kind of -- your views of recapturing share in that server CPU market? Thank you.

Patrick P. Gelsinger -- Chief Executive Officer

Yeah. Thank you, Aaron. And I'd say our goal is stabilize our position and grow from that position. And this was a solid quarter for our execution.

Clearly, Xeon 6, Granite Rapids and Sierra Forest now fully shipping and available are important milestones. Obviously, the AWS deal was a very nice deal because it reinforces Xeon, but also our expanding role of customization. So, I'll say the first order of business is hold share and then regain share. The strength that we've seen for Xeon is these AI head nodes, these AI use cases.

We have very good performance on Granite Rapids for AI use cases. And as we look to the future, getting just more competitive on basic power performance per core and fighting for share there is clearly the initiatives that we have underway. Clearwater Forest powered on, right, showing health of 18A. Diamond Rapids will shortly go into fab.

So, the road map is in good solid shape as well. So, I'd say, overall, we feel that is a good pathway. And if I add to the last question as well for AI, I'd also emphasize that all of the energy has been in training, you know, and almost all of that associate it with cloud-based training. But training is creating the weather model, not using it.

And increasingly, I think every analyst is putting more and more attention to how do we use those models, how do we inferencing against them, how do we retrain for our localized data, how do we complement that with RAG and database embeddings, and all of those are areas that are much more CPU-centric. So, the strength of our CPU and its unique power in some of these AI use cases as well is something we see the market coming more toward us and the strength that we've traditionally had.

John Pitzer -- Corporate Vice President, Investor Relations

Thank you, Aaron. Jonathan, can we have the next question, please?

Operator

Certainly. And our next question comes from the line of Srini Pajjuri from Raymond James. Your question, please.

Srini Pajjuri -- Analyst

Thank you. Pat, I have a question on the foundry side, in particular, the packaging business you have. I know, even though there's a lot of skepticism about 18A, but I think you guys have pretty good packaging technology. And it's proven, I believe, if I look at EMIB and Foveros, etc.

So, my question is, given the tightness in the packaging industry right now, I would have thought we would see more interest in your packaging services. So, I'm just curious as to why we are not seeing that. Is it because it's -- I guess there must be some nuances of using your packaging with the TSM wafers. I'm just curious as to why we are not seeing more interest.

Patrick P. Gelsinger -- Chief Executive Officer

Well, I'd say we do see significant interest in this area. And moving your supply chain, though, is complicated and takes qualification time. And many of these designs were first designed on CoWoS, and now they're looking at Foveros, and then they're looking at the unique technologies that we have like EMIB as well. So, we actually see very good momentum in that area.

Now, those aren't as revenue-producing as wafer design, so they're not nearly, right, as large in size. But the pipeline of activities is very strong. And the quarter-on-quarter improvements we saw were largely driven by advanced packaging. Most of the external revenue that we'll see, which will be nicely up year on year as we go into '25, in the external foundry will be advanced packaging.

And we also see healthy margins for that technology as well. So, moving supply chain is always hard and slow, but the progress that we've seen already, the design wins that we already include in our LDV and then the pipeline of additional designs that we are engaging in, all of it give us great optimism that this becomes a foundational piece of our foundry business for the long term. And as I noted in an earlier comment, we did see our advanced packaging now as a profitable business to stand alone by itself as well.

John Pitzer -- Corporate Vice President, Investor Relations

Srini, do you have a follow-up question?

Srini Pajjuri -- Analyst

Yes, I do. I guess a question on the gross margin side, Dave. I guess there are two issues impacting your PC gross margins. One, the wafer outsourcing and the other, you said packaging of the memory.

I'm just curious how much of an impact that memory packaging is having on your gross margin. I suppose that helps your ASPs, but I guess it hurts your gross margin percent. So, just curious to know how much of an impact that's having. And then maybe for Pat, architecturally, why do we need to, I guess, combine memory in one package? And is this something that's going to be ongoing? Or is it just a one-off with, I guess, Lunar and Meteor Lake? Thank you.

David A. Zinsner -- Executive Vice President, Chief Financial Officer

Yeah. And just to be clear, it's exclusive to Lunar Lake but not Meteor Lake. And it's having a pretty meaningful impact, a significant impact on Lunar Lake's gross margins. And originally, we were like a third of the volume in terms of our expectations next year on Lunar Lake when we recognized how important the AIPC market would be and how good this part was competitively.

We pushed the volume significantly up. And so, that has put some reasonable pressure on the gross margins for the total company.

Patrick P. Gelsinger -- Chief Executive Officer

Yeah. And maybe architecturally, the second half of that question, Lunar Lake was initially designed to be a niche product that we wanted to achieve highest performance and great battery life capability, and then AIPC occurred. And with AIPC, it went from being a niche product to a pretty high-volume product. Now, relatively speaking, we're not talking about 50 million, 100 million units, but a meaningful portion of our total mix from a relatively small piece of it as well.

So, as that shift occurred, obviously, this became a bigger margin implication, both for Lunar Lake and for the company overall. But we were very pleased to have the option to scale Lunar Lake and higher volume because of the momentum energy around the AIPC category. That said, a volume product and a volume industry like the PC industry, you don't want to have volume memory going through that channel. It's not a good way to run the business.

So, it really is, for us, a one-off with Lunar Lake. That will not be the case with Panther Lake, Nova Lake and its successors as well. We'll build it in a more traditional way with memory off-package and the CPU, GPU, NPU and I/O capabilities in the package. But volume memory will be off-package in the road map going forward.

And we won't have this kind of impact that we're dealing with for '25 in the margin structure, specifically around Lunar Lake. But again, it's a great product and we're happy that we have it in the portfolio, and we've scaled it commensurate with the enthusiasm of the AIPC category.

John Pitzer -- Corporate Vice President, Investor Relations

Thanks, Srini. Jonathan, can we have the next question, please?

Operator

Certainly. Our next question comes from the line of Chris Caso from Wolfe Research. Your question, please.

Chris Caso -- Analyst

Yes. Thank you. Good evening. I guess the first question is on both capex and opex as you go through next year.

And I think you were a bit clear about what the plans are and what the resulting free cash flow is. I guess, Dave, the question is how much flex maybe in those numbers. I guess as you go through '25 and '26 as well, given the fact that you do have to invest in new technology nodes, how much flex is there for changes in market conditions. Also recognize that you don't have pretty much revenue growth in the plan for that as well.

David A. Zinsner -- Executive Vice President, Chief Financial Officer

Yeah. I think on the $17.5 billion for opex, that's a pretty firm plan. I mean, obviously, we can make some adjustments here or there, if necessary. But we think we've rightsized the investments to invest in the most important areas that Pat and the team want to pursue.

And so, that, I would say, is relatively firm. Maybe there's just a little bit of variability there that we can make adjustments as we kind of progress through the year. The capex, there are three components to capex. There is what we're going to invest for the process, advancing the process.

There's investment associated with this shell ahead and there's investments associated with capacity. We're always going to make those investments to advance the process. That will always be the case. Shell ahead, we will, but we have largely caught up, I think.

And so, now we're going to be more measured, I think, as we look to increasing our shell capacity. And then capacity itself then becomes the flash, the tooling out of shells, and we're kind of modulating that based on what we see in terms of demand and, of course, managing it relative to cash flow. So, there obviously is flexibility there as we progress through the year and into the following year. And our goal is to generate free cash flow, to generate adjusted free cash flow next year and there -- and onwards.

So, we'll be managing net capex accordingly. I guess the one other variable to the net capex would be any of the offsets. And of course, we're aggressively pursuing offsets, some of which we know will already show up next year. SCIP will be a component of our offsets next year.

We're also going to start to see some more meaningful impact from the investment tax credit next year, which we have already baked into the forecast.

Patrick P. Gelsinger -- Chief Executive Officer

Chris, yeah, the thing I would -- just to add a little bit to that, Chris, would be that now that we've gotten an EUV fleet, right, into our capex base, we have a lot more flexibility across that fleet. Largely, the capex used for Intel 3, 18A and 14A highly leveraged across it. So, we're much more building to overall capacity requirements and not this very rapid five nodes, four years, get back to a modern fleet of capability. Obviously, the other point to add to that is now that we have finished these five nodes, four years, we're progressing to a more normal cadence of new technologies, as opposed to this racing through capital.

So, that will also give us additional flexibility. And I'll say largely, with the singular exception of High NA EUV, the equipment bases are almost entirely the same across the 14A node as well. And even at High NA, we've built flexibility into the TD development that we have optionality to include or not include that as a central part of it. So, we've built a lot of capacity.

Now, we're going to leverage that capacity in much more efficient ways for both an overall high-volume manufacturing and a TD leverage going forward.

John Pitzer -- Corporate Vice President, Investor Relations

Chris, do you have a quick follow-on?

Chris Caso -- Analyst

I do. And I mean, it's a good segue in the next question, Pat, and it's -- I guess a question about your comments on Better Together and if you could kind of explain the rationale of why you think that's the case. Obviously, there's various opinions on that. And if Intel would be willing or has looked at anything strategic beyond what the current plan is right now.

Patrick P. Gelsinger -- Chief Executive Officer

Yeah. And I'll just say we're very comfortable that moving to the subsidiary model, as we outlined in the last earnings call, gives us, I'll say, three that we're aiming for: greater operational rate integrity, right, as we create that clear separation; the opportunity to be able to communicate that more clearly and definitively to our external customers; and then the potential to fund and manage the capital requirements of foundry. That said, the vast majority of volumes through the decade come from Intel Products. The synergies of that co-development and Customer Zero aspect is very substantial as we see it.

And the benefits that we get from the overall cash flows and managing the balance sheet of the company as we go forward are highly beneficial as well. So, for all those reasons, our simple view is distinct but better together.

John Pitzer -- Corporate Vice President, Investor Relations

Thanks, Chris. Jonathan, we've got time for one last question, please.

Operator

Certainly. And our final question for today comes from the line of Joe Moore from Morgan Stanley. Your question please.

Joe Moore -- Analyst

Great. Thank you. In your opening remarks, you talked about narrowing the product focus and prioritizing x86. Can you talk about, practically speaking, what happens there? Does that mean -- are there other areas you're investing less in to focus more on x86? Is that a mindset shift, organizational shift? Just what do you mean by that?

Patrick P. Gelsinger -- Chief Executive Officer

Yeah. And there's a lot of details behind it, Joe, but I'll just maybe give a couple of quick examples. We, for instance, create complexity in the server product line, E-cores, P-cores, across different socket types. And that complexity was maybe appropriate when the business was substantially larger and growing.

At its current size, it puts too much complexity on our development as well as our customers and the OEM, how many SKUs they're developing. So, we've taken steps to simplify the product line, have fewer SKUs to cover the marketplace, and we're focused on the efficiencies associated with that. Similarly, in the client product area, simplifying the road map, fewer SKUs to cover it, how are we handling graphics and how that is increasingly becoming large integrated graphics capabilities. So, less need for discrete graphics in the market going forward.

So, simplifying the road map in those areas. And then the steps we took around our CCG and edge business to be able to bring that together for better reach to the market, leveraging our core investments. So, a variety of those, but many others behind that as we get ourselves, I'll say, in fighting shape that allows us to leverage our investments, hit our $17.5 billion opex that Dave spoke about, and still have a very solid growth in a more profitable way for the future.

John Pitzer -- Corporate Vice President, Investor Relations

Joe, do you have a quick follow-on?

Joe Moore -- Analyst

Yeah, I do. To the extent that you are kind of prioritizing the x86 leadership that you have, does anything shift in the IDM 2.0 model? Is it -- they referenced that the arm's length relationship with IFS is still going really well. Like is that still a focus? Is there a benefit to, if the focus is more on internal foundry versus excess, to marrying those business more tightly? Just how do you think about that relationship.

Patrick P. Gelsinger -- Chief Executive Officer

Yeah. And clearly, external foundry, right, requires a different view of how you run and manage that business, but the wafers, the cash flows come from the internal business. So, this subsidiary model is a key piece of how we're going to drive that cultural transformation but still bring the success of an at-scale leading edge, western-centered foundry model. That is an extraordinary asset for us, for the industry and for the world.

So, we're very focused on making that successful. This has been an extraordinary journey to accomplish five nodes in four years and bring us from years behind to a leadership position in technology. And wow, it's just stunning to see what our TD teams have been able to accomplish there. But we're not done.

We have a lot of work in front of us yet. We're well on our way to completing what will be one of the most seminal restructuring in the history. The steps that we took in our financial restructuring this quarter was very critical to be able to bring us to a point that we can say we have the capacity to and driving to long-term shareholder return. So, maybe just as we wrap up.

Thank you, as always, for joining the call. We appreciate the opportunity to discuss our progress, the actions we've taken. Q3 was a good step. Now, we need to finish the year strong and prepare for 2025.

We're determined to get it right, and I look forward to the updates along the way. Thank you, and look forward to speaking to you all again soon.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

John Pitzer -- Corporate Vice President, Investor Relations

Patrick P. Gelsinger -- Chief Executive Officer

David A. Zinsner -- Executive Vice President, Chief Financial Officer

Ross Seymore -- Analyst

Pat Gelsinger -- Chief Executive Officer

Dave Zinsner -- Executive Vice President, Chief Financial Officer

Timothy Arcuri -- Analyst

Tim Arcuri -- Analyst

C.J. Muse -- Analyst

Vivek Arya -- Analyst

Aaron Rakers -- Analyst

Srini Pajjuri -- Analyst

Chris Caso -- Analyst

Joe Moore -- Analyst

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